The Importance of Measuring the Fiscal and Economic Costs of Climate Change

By Candace Vahlsing, Associate Director for Climate, Energy, Environment, and Science, Office of Management and Budget & Zach Liscow, Chief Economist, Office of Management and Budget

Climate change impacts our economy, health, well-being, security, and quality of life. According to the National Oceanic and Atmospheric Administration (NOAA), the cost of climate and weather disasters in the United States last year totaled more than $165 billion—the third most costly year on record. And this cost fails to capture the devastation from lives lost, the toll on our healthcare, and the impacts on American families and communities upended and displaced by increasing climate crises. As temperatures continue to increase—causing more severe heat waves, coastal flooding worsened by sea-level rise, and other natural disasters—the costs of climate risk will likely continue to rise in the coming years.

In recognition of these risks, President Biden’s Executive Order on Climate-Related Financial Risk directed the Council of Economic Advisers (CEA) and the Office of Management and Budget (OMB), along with experts across the U.S. Government, to develop methodologies to integrate climate risks into the President’s Budget. Climate risks could affect the Budget and the overall fiscal outlook through a number of pathways, including altering total tax revenue through effects on Gross Domestic Product (GDP) growth, and changing Federal spending to respond to climate impacts, both to ameliorate climate damages and spur the transition to clean energy.

To conduct this vital work, the U.S. Government established two interagency working groups. The first group was established to assess the fiscal risk posed by the impacts of climate change through its effects on the macroeconomy. The second was formed to develop methods and conduct assessments concerning how climate risk directly impacts the cost of Federal programs and to share climate data across the Federal government. Over the last two years, these groups engaged in a range of analyses incorporated in both last and this year’s Budgets and helped produce four white papers. Thus far this work points to three overarching conclusions:

• $134 billion in annual expenditure impacts for just six types of disasters – and as much as $2 trillion in lost revenue annually by the end of the century.

• Existing quantitative assessments of the fiscal cost of climate change have already resulted in new Fiscal Year (FY) 2024 Budget proposals that will decrease the Federal government’s short- and long-term climate fiscal risk.
• Existing climate-related financial risk data, analytical tools, and methodologies require further refinement to more accurately quantify specific risks from climate change and inform our policies to combat these risks.

Even as further data and methodological advances are necessary, the U.S. Government has made substantial progress in evaluating climate risk to specific Federal programs. Through its FY23 analysis, OMB sharpened our understanding of some of the largest impacts of climate change on the Federal Budget. These findings directly informed new policies in the FY24 Budget that aim to reduce climate risks and the costs of climate change in the long term. For example, last year OMB found that the Federal cost of crop insurance could increase by more the $2.2 billion by the end of the century due to climate change. The FY24 Budget includes a new proposal to provide incentives for farmers to plant cover crops to make their fields more resilient to climate change. For this year’s Budget, OMB committed to collaborate with our interagency partners on a framework for conducting assessments of climate-related financial risk to Federal assets and expenditures and to coordinate on sharing climate risk data across the Federal government.

Similarly, whereas last year’s analysis on long-term effects of climate on Federal debt only considered the macroeconomic consequences of a high-end, worst-case climate scenario, the FY24 Budget introduces a more robust analytic framework. The FY24 Long-Term Budget Outlook Analytical Perspectives chapter considers three different emissions scenarios to evaluate how the damages of climate change on U.S. GDP could affect the debt-to-GDP trajectory. A new CEA-OMB White Paper compiles evidence on a broad range of pathways by which climate change and building a clean energy economy can affect the macroeconomy and evaluates methods to improve assessments for future Budgets (White House 2023). These improvements will strengthen the U.S. Government’s capacity to anticipate and to mitigate climate risks and to facilitate meeting the President’s goal of building a clean energy economy with net-zero emissions.

OMB’s FY24 analysis on the cost of climate change to the Federal Budget presents test case analyses to evaluate the impact of climate change on the Budget with a focus on three specific sectors – Federal lending for single-family housing, the cost of replacing Federal facilities due to sea level rise, and changes in heating and cooling costs. These analyses determined that existing climate related financial risk data, analytical tools, and methodologies have significant limitations that impede the ability to develop robust cost estimates for the sector evaluated this year. Despite these limitations, the results of these tests cases yielded initial sector-specific findings, including:

• Federal single-family housing portfolio: Five types of climate hazards are anticipated to cause half of the annual losses of unpaid principal balances across the United States Department of Agriculture (USDA), Department of Veterans Affairs (VA), and the United States Department of Housing and Urban Development (HUD)’s single-family housing portfolios.
• Heating and cooling assistance: By this century’s end, the 20-year average for heating degree days is projected to decline by up to 30 percent, while the average number of cooling degrees days is projected to increase by up to 60 percent. These changes may affect energy demand for heating and cooling, and in turn, the Low-Income Home Energy Assistance Program funding.

Climate risk data show us that if we fail to invest in building resilience to reduce climate change damages now, we will fail at our responsibility to properly manage Federal funding on behalf of tax payers.

In the face of increasing costs associated with the impacts of climate change, the Biden-Harris Administration continues to invest in mitigating climate related risk by taking steps to reduce greenhouse gas (GHG) emissions. If we do not continue to invest in steps aimed at reducing GHG emissions, the data indicates that the costs to the government, and society as a whole, will rise even more.

The first two years of the Administration marked a turning point in progress toward reducing GHG emissions, with the United States now on a clear path toward a transformed, clean-energy economy. Important GHG emissions-related policy changes from the past two years include:

• The Inflation Reduction Act, a $369 billion investment in modernizing the U.S. energy system.
• The Bipartisan Infrastructure Law, which makes major investments in infrastructure essential for the clean energy future such as public transit, electric vehicle charging, and transmission.
• Ratification of the Kigali Amendments to the Montreal Protocol, an international agreement to accelerate phase-down of highly potent hydrofluorocarbons.
• The 2021 EPA Light-Duty Vehicle Greenhouse Gas Standards and NHTSA CAFE Standards, which will avoid more than 3 billion tons of GHG emissions by 2050.
• The proposed EPA Methane Rule targeting methane emissions from the oil and gas sector.
• The FY24 President’s Budget investing a total of $52.2 billion in discretionary budget authority to tackle the climate crisis – the largest budget request for climate change in history.

The Inflation Reduction Act and Bipartisan Infrastructure Law investments put America on track to decrease greenhouse gas emissions by about 40 percent below 2005 levels in 2030—positioning America to meet President Biden’s climate goals of cutting greenhouse gases at least in half in 2030 and reaching net zero by no later than 2050.

The Biden-Harris Administration’s climate policies strengthen our economy’s resiliency and efficiency. It is imperative that we continue to invest in climate programs through the annual appropriations process to achieve our climate goals and build clean energy projects all across America that create good paying jobs. Reducing GHG emissions provides real economic benefits, including reduced risks of current and future life-threatening heat waves and of future damage to homes and infrastructure caused by extreme weather (White House 2022).

For example, calculations by CEA suggest cost reductions driven by Inflation Reduction Act subsidies just for solar and wind energy will reach $90 billion for capacity installed through 2035, savings that accrue both in the U.S. and globally. Larger cost declines—on a percentage basis—are expected for more nascent technologies, for which learning effects are often more pronounced, including geothermal electricity generation, hydrogen production, and the direct capture and storage of carbon dioxide from the air. These cost declines could spur economic productivity and lower inflation, but due to data limitations are as of yet unaccounted for in the economic analysis that underpins the Budget.

Through its budget development and implementation process, OMB identifies the benefits of climate investments through several avenues. OMB directs agencies to prioritize investments that create good-paying clean energy jobs and reduce GHG emissions in initial budget guidance, and asks select agencies to measure, when feasible, the relative GHG reductions of programmatic budget investments when submitting their budget request. In the budget implementation phase, OMB works with agencies to leverage appropriated dollars to reduce carbon pollution.

An important next step of this work will be to improve our capacity to incorporate our understanding of climate risk into the economic assumptions that underlie the President’s Budget. The extent to which the United States meets, exceeds, or fails to meet its emissions goals will impact the economic and fiscal outlook over the short, medium, and long term. Accurately incorporating the economic assumptions associated with climate risk into the President’s Budget moving forward will be vital to this nation’s long-term economic health. While substantial progress on this front has been made over the last two years, current economic data and analytic tools are not purpose-built to incorporate this progress into the analysis that underpins the Budget. CEA and OMB are jointly collaborating with interagency partners to improve existing methods to quantify the macroeconomic effects of climate change and building the clean energy economy of the future.

Accounting for climate risk in both the economic forecasting and the program analysis that underpins the President’s Budget will help limit the costs of climate change to our economy and our health – and help ensure a brighter future.